The manner of VAT deduction depends on the use of a building

The case analysed by the Head of the KIS concerned the question of a municipality which buys and installs photovoltaic panels, among others, on a municipality office building, but also on school buildings.

– In the interpretation issued, the KIS Director explained that in order to fully deduct input VAT, the cost must be related to the VAT taxable activities of the taxpayer. This rule thus excludes the possibility of deducting input tax related to goods and services which are not used for VAT taxable activities at all, i.e. in the case of their use for activities which are exempt or not subject to VAT. At the same time, it must be stipulated that the deduction of input tax may be partial, i.e. in the part in which the goods or services to which the input tax is related are used for taxable activities, disregarding the part of the tax on these goods and services in which these goods (services) are used for activities not subject to VAT, explains Grzegorz Arczewski, senior manager at Thedy & Partners.

So what should a municipality do? First of all, it is obliged to separately identify with which type of activity the VAT resulting from the purchase invoices received will be related. If such a separation is possible, the taxpayer, pursuant to Article 86(1) of the VAT Act, has a full right to deduct input tax on the purchase of goods and services related to the VAT taxable activities, performed as part of business activity. However, there is no such a right in relation to input VAT on the purchase of goods and services used to carry out activities which are not subject to this tax and which are exempt from taxation. 

It also follows from the quoted interpretation that with respect to costs incurred on the supply and installation of photovoltaic installations on public utility buildings – e.g. on schools – which will be used both for the purposes of business activity – for taxable activities and for purposes other than business activity and the municipality will not be able to allocate the incurred expenses to particular types of activities, in order to calculate the amount of input tax, the municipality will be obliged to apply the method of determining the proportion specified in Article 86(2a) et seq. of the VAT Act and in the provisions of the Regulation of 17 December 2015, separately for each of the budgetary units using the investments in question.

Individual interpretation of 10 October 2022, No. 0113-KDIPT1-1.4012.577.2022.2.ŻR.

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